(Bloomberg) -- Speaker Kevin McCarthy stoked optimism on Thursday about a US debt-limit deal getting reached on Capitol Hill, after negotiations narrowed to top staffers for McCarthy and President Joe Biden.

“I can see now where a deal can come together,” McCarthy told reporters Thursday.

Even so, one key McCarthy ally, House Financial Services Chair Patrick McHenry, later on Thursday tempered expectations for a quick agreement, saying that the two sides were “not close to being done.” 

With the Treasury Department warning that the government could run out of cash to meet all federal obligations as soon as June 1, here are the key issues negotiators are discussing:

Spending caps

The heart of a deal will be setting discretionary spending caps, and there are fresh signs the two sides are moving closer to each other’s positions. Republicans want to slash domestic spending over a decade, while Democrats prefer smaller cuts over a couple of years.

A compromise could be found by shifting some programs outside the discretionary budget, or allowing cuts to mandatory spending to count toward the savings.

The tension: Hawkish Republicans like Senate Minority Leader Mitch McConnell want to increase defense spending, especially with the war in Ukraine continuing. Progressives, meanwhile, are balking at caps that squeeze environmental, health care and other priorities — especially if the Pentagon budget is protected.

Covid clawbacks

A deal is almost certain to include at least a partial clawback of unspent money from previous Covid-19 packages. The nonpartisan Congressional Budget Office says about $56 billion could be taken back, while House Budget Committee Republicans says it’s $64.6 billion.

A compromise can be found by allowing the clawback to count toward the lower spending cap in 2024.

Work requirements

The bill that House Republicans passed in April — which wasn’t taken up by the Senate, given Democratic opposition — featured new work mandates for able-bodied Americans on Medicaid, and stricter ones for those using the food-stamp program or welfare. The measures would save $120 billion over a decade, according to the CBO, with $109 billion coming from Medicaid.

Biden has previously supported tougher work requirements, but says he wants to leave the Medicaid health insurance program for the poor untouched. Doing so would decrease the size of the cut — risking conservatives’ support for any agreed bill. Tougher work standards for the Supplemental Nutrition Assistance Program, or SNAP, along with the Temporary Aid to Needy Families program, would still give Republicans an ideological trophy — though cost the backing of many Democrats, including House Minority Leader Hakeem Jeffries.

Permitting reforms

Both parties want to accelerate the process of getting permits for energy and other projects, though they differ on the details. Democrats have focused on speeding approvals for renewable energy projects, transmission lines and the mining of critical minerals needed for electric vehicles. Republicans are more insistent on easing hurdles for fossil fuels.

One idea that has been discussed by lawmakers this week: including some provisions accelerating approvals under the National Environmental Policy Act and setting up a broader follow-on package in the coming months.

Debt-limit duration

Democrats want to suspend the debt ceiling until after the November 2024 election. McCarthy’s offer is through next March, but he has said the particulars are up for negotiation.

If lawmakers can’t reach a broader deal, one option would be to increase the debt limit by, say, about $100 billion, to give themselves more time to negotiate. Nobody ever wants a short-term deal until they have their backs to the wall, however. 

14th Amendment

A group of progressives, including Democrats Tina Smith of Minnesota, Elizabeth Warren of Massachusetts and independent Bernie Sanders of Vermont, are pushing Biden to prepare to invoke the 14th Amendment to declare the debt limit unconstitutional. That Civil War-era amendment prohibits questioning the federal debt. Democratic Senator Sheldon Whitehouse of Rhode Island has also argued that the president has discretion to keep borrowing to pay the nation’s bills when laws conflict with one another, citing legislation that requires the president to spend money that was appropriated by Congress.

The push is aimed at giving Biden leverage to avoid cuts progressives see as untenable.

Conservatives’ insistence

While progressives may be trying to give Biden leverage, conservatives moved on Thursday to harden McCarthy’s stance. The hard-right Freedom Caucus called for an end to bipartisan talks to raise or suspend the federal debt limit, insisting instead that the Senate vote on the House Republican bill passed in April.

Read More: Freedom Caucus Urges End to Debt Talks, Senate Vote on GOP Bill

Procedural obstacles

Bills like the one under discussion usually are locked down on the House floor using a rule known as “martial law” to prevent any amendments that could sink the deal. If McCarthy did that, though, he could anger his right flank. McCarthy has also said he wants to abide by a House rule giving lawmakers multiple days to review a package.

The Senate poses another potential problem, because any one senator can delay a deal for days. Bottom line: This isn’t something you want to be hammering out an hour before a default.

Wild cards

While some lawmakers have been pushing to include complex measures such as immigration reforms or prescription-drug price cuts, issues like those usually get dropped as the nation gets closer to potential default, and senators in both parties told Bloomberg News they don’t expect them to be included. 

But another wild card is Donald Trump. The former president has been a close ally of McCarthy and remains influential in the party. He has also criticized Republican leaders in the past for cutting debt-limit deals. Opposition from Trump may not be enough to kill a deal, but it could make life more difficult for McCarthy in the longer run, given his thin majority.

(Updates with Jeffries’ position, attribution for clawback estimate, McCarthy debt ceiling extension offer length)

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